28 Smart Questions to Ask Your Self Directed IRA Custodian

This might seem like a simple question, but many people don't understand the difference between the two. The Internal Revenue Code requires that an IRA is held at a qualified custodian. As long as the self-directed IRA custodian you are using fits this criteria, then you will have met this requirement. However, someone still needs to administer your IRA for you. This is where the distinction between administrators and custodians comes in.

Our list of self directed IRA custodians and administrators is divided into custodians and administrators. There are currently over 45+ companies that provide custody and administrative services to self directed IRAs.

As long as the Internal Revenue Code criteria are met, you can choose either a self-directed IRA custodian or administrator for your self-directed IRA. Either type should be sufficient for your needs.

See our explanation of self directed IRA custodians and administrators above for more information

The Internal Revenue Code requires that Individual Retirement Accounts (IRAs) are held at a qualified custodian. If the IRA is not held at one of these institutions, then you may have created a prohibited transaction. This is a very important question to ask. It is of primary importance that your retirement account is held at a custodian, who it is held with is secondary.

Would your go to an attorney that specializes in real estate to do your estate planning? Would you open an account at a retail bank to trade stocks? Maybe. But most people would choose a firm that specializes in the area they need help in. Firms that specialize in a niche tend to offer better services in that niche.

If a company is providing self-directed IRA services, then they should be proficient at this task. You don't want to choose a custodian only to find out that they cannot process your request because they have never done it before. Also if you are using a company that is not as active with self-directed IRAs, this might result in slower service, mistakes or errors due to a lack of knowledge to handle your request.

Most companies on our list of self-directed IRA custodians and administrators do have self-directed IRA custody or administrative services as their primary line of business.

IRAs have been around for over 40 years, how long has this company been around? Having knowledge is one thing, having experience is something else. You want to make sure the service team for the company you are considering has experience. You will be working directly with the service team, so you will want to make sure you are getting accurate information. Do the company service people have industry designations (CISP or SDIP)? How knowledgeable are they? Industry designations are not essential, but they do show a level of commitment to learning about the industry they work in and a level of competence of the information they studied.

Any time you entrust your retirement savings to a company, you want to make sure that company has a regulatory body that keeps them compliant by providing oversight. Broker-Dealers are regulated by FINRA, Registered Investment Advisors (RIAs) are regulated by the SEC (or state regulators), Banks are regulated by the OCC (or a state regulator), and licensed professionals are regulated by state licensing boards or trade associations.

This oversight is important because it provides a layer of protection for investors. It shows that someone is watching over the company to make sure they follow certain protocol. This may not provide absolute security over your accounts, but it will provide some protection.

Most states do not require oversight of administrators. However, if the administrators are using a qualified custodian, the custodian ultimately holds the responsibility, so the custodian would be providing some oversight on your account. Make sure you ask who their regulator is and how frequently they are audited by that regulator.

An independent third-party audit is another way to ensure the company is acting appropriately with your retirement funds. Just like with regulatory agencies, this does not guarantee the company's books are sound, but it is an added layer of oversight that can provide you with some protection. Most of the companies on our list have periodic audits which occur annually at a minimum. Some of them are audited more frequently. These are all positive things that you should want to see as an investor.

Note: Just to clarify, getting audited by a regulator or an independent third-party is different from being "audited" by the IRS as an individual. Being audited by a regulator or third-party is in many cases mandatory as a part of industry best practices and regulatory oversight. It does not mean that the company did anything incorrectly. Many industries require an annual audit for all firms.

This question pertains to the size of the company you are considering. The firm's size can be measured in the number of accounts, number of clients, or assets held in custody (or assets being administered). The size of the firm can range from under $100 million in assets under administration or over $15 billion in assets held in custody.

All of these measurements can be used to measure the size of the company and how capable they are to service your requests. If a company has over 400,000 accounts and only has 2 service people, then they might be less capable of handling your requests than a company who has 1,000 accounts and only one service person. However, a large company might indicate the company is more successful due to its size. You would need to consider how each of these data points helps you better understand the company you are considering.

This will address how active the company is in their own industry and if the company has any financial bias (such as a subsidiary, or joint venture). Are they a part of organizations or trade groups? If so, in many cases these associations or trade groups will assist or advise them on best practices of handling industry problems.

For self-directed IRA custodians and administrators, Retirement Industry Trust Association (RITA) is the primary industry association. RITA does a lot to help with best practices on issues such as preventing fraud.

Alternative and Direct Investment Securities Association (ADISA) is another such association. ADISA's focus is more on alternative investments with broker-dealers, financial advisors, and investment sponsors. They also provide education to financial industry professionals.

While you might put some weight into this question, this would not cause me to change my decision at all. It is easy to pay money to be a part of an association. Personally, I find it more useful to get to the know the company and what is important to them.

It is important to consider the total costs you will have pay to implement a certain investment strategy. It is a fact that over time high fees reduce the net return to investors. However, all companies charge a fee, so you will have to compare one company to another to find the best solution for your investing needs. For example, if you are comparing a hedge fund that has an average return of 20% annually, charging 2% (net 18% return) to a S&P 500 index fund charging 0.12% with an annual return of 5% (net 4.88% return), then the net returns for the hedge fund would be the better investment.

You won't get an apples-to-apples comparison if you compare your stock index fund performance to the performance of your rental property. I only point this out because some investors despise fees even though it can ultimately benefit the investor by paying more. This can be the case for self-directed IRA custodians and administrators as well. If you have a $100,000 IRA and you are looking to set up and IRA at a broker-dealer, it might cost you $10 per trade. If you are not an active trader, this might cost you $100 or less for the entire year. This is the equivalent of 0.10% in costs.

If you use a self-directed IRA custodian or administrator, it might cost you $500 a year for your investment. The fee amounts will vary depending on how many transactions you engage in, whether you require wires, document storage, and other services. However using one of these companies might allow you to invest in an area that you are an expert in (such as horses, real estate, private equity, etc) and this could ultimately earn you more than you would potentially make in the stock market (where you may not be an expert).

While most of these companies on the surface will charge more for their services than a traditional broker, the net return is what is most important, not the fees. If you research what you expect to pay in fees for your investment strategy, you will find out whether a traditional custodian or self-directed IRA custodian is a better choice for you.

The best way to look at their fee structures is to separate them into: Asset-based fees and Transaction-based fees.

Asset-Based Fees

Companies that charge asset-based fees will charge you a percentage of the assets you hold in your account at their firm. Many of these companies have a fee cap, so if you have $100 million IRA like Mitt Romney, you might only be charged $2,000 for the year. However if you have a smaller account size, the fee percentage might be a much larger percentage of the total amount.

Most companies on our list will charge a minimum fee regardless of whether you do any transactions or how much you hold at their firm. Companies which use asset-based fees all have a minimum fee that they charge, so if you want to open up a $1,000 IRA, then it may not make sense if the minimum fee is $300 a year. Some of these companies have quite a few accounts opened which are never invested or funded, yet they will still incur a fee for keeping the account open. Make sure you run a calculation on your expected fees to determine whether it makes sense to open this type of account.

Transaction-Based Fees

Transaction-based fees are typically set up with a flat fee amount which is small and then for each transaction (buying a new investment, paying the electricity bill on your real estate, cashing a rent check), you will be charged a small fee. This is similar to the broker-dealer who charges a fixed amount for each stock trade you make in your account.

In addition to these two types of fee structures, there are hybrid fee models, per asset fees, and flat fees. These are not as common as the asset-based or transaction-based fee models, but they do exist for investors who find them to be a good fit. The hybrid fee models generally take some aspects of each and combine them to address a certain need.

Lastly, a few of the companies on our list provide investors with a choice of two or more fee models. This can be extremely helpful if you want to use one custodian or administrator and have different investment strategies that require different fee structures in different accounts.

Which fee structure is best for you?

We have created some tools to help you make these types of decisions in our Self Direct Your Retirement resources. One of the resources that is available to investors in this program is a fee calculator. Each company has a fee calculator associated with their fee schedule. You can use this calculator to estimate the fees you would pay by using a specific company. This will quickly help you make a determination about how the fee schedule will impact your investments.

Learn more about our shortcut to finding the best self directed IRA custodian...

Every company on our list of self-directed IRA custodians and administrators allows Traditional IRAs and Roth IRAs on their platform. But that is where the similarities end. Other account types such as SEP IRA, SIMPLE IRA, Solo K, Group 401(k), Defined benefit, ESOP, HSA, ESA, UTMA, non-qualified, Trust, and Corporate are available at some of these firms but not all.

If the company you are considering doesn't allow the type of account you need, then you will have to remove them from consideration.

The Internal Revenue Code (IRC) puts a few restrictions on what assets can be held in a self-directed IRA or 401k plan. Virtually any asset is allowed except for a few prohibited assets (e.g. life insurance, s-corps, and collectibles). While the Internal Revenue Code allows all other assets to be held in a retirement account, many custodians or administrators put additional restrictions on what assets are allowed to be held at their company. They have their own list of what is allowed to be held.

In no case will a custodian or administrator be able to offer custody for an asset that is not allowed by the Internal Revenue Code.

Every firm has their reasons for why they only allow certain assets. Some assets are harder to administer than others. Some companies want to specialize in order to speed up their efficiency. Other companies feel certain assets hold an increased liability for the custodian or administrator.

Many companies do not publish their entire list of allowable asset types. Therefore we have compiled a list of what each company allows for assets to be held at their firm in our Self Direct Your Retirement resources.

If the custodian or administrator does not hold the asset you are considering, just remove the company from your list and move on. We have been able to find a custodian or administrator to provide self-directed IRA services for every asset we could think of, but some assets had a limited number of companies willing to hold it.

While it would be better to use a company that specializes in the asset type you want to invest in, it is not essential. If the company allows the asset type, then they will have some prior experience with that asset. If you want to invest in some asset that is not commonly held, like bitcoin, church bonds, or horses, then it might be hard to find a custodian or administrator who specializes in this area.

If it comes down to two companies, one that specializes and another one that does not, it might make your investing experience better to choose the specialist, otherwise, don't put too much thought into it.

This question is hard to get a reliable answer to, but important nonetheless. I certainly would not expect to get a straight answer from the company by asking this question directly.

In order to get some perspective, we have asked each company a number of questions pertaining to their operations to get a feel for how well run their company is.

We have certain criteria that is important to us when considering a self directed IRA custodian. Many of these criteria also happen to be good indicators about their operations. I want to highlight certain things which you should consider in your research

These are some questions you should ask about the company's operations

• How many employees does your company have?
• What are your company's procedures for investments that are suspected to be frauds?
• How do you protect client information?
• How do you handle annual valuations?
• What is your process of setting up a new account?

The number of people is less important than the ratio of service people to clients. Customer service is a large part of administering alternative investments. If you are buying a piece of real estate and need to meet a deadline for a closing, then you need the service team to be responsive. There are inevitable problems or changes that come up in many real estate deals. You want a service team that can manage these changing conditions.

We find that in many cases these delays can be attributed to investors not providing all the information and documents that are needed by the custodian, but you still need the service team to be ready to help.

This may not be important to you as an individual investor. However, if you are a financial advisor, attorney, accountant, or custodian looking for a company to provide sub-custodial services to your client, then this will be very important. My company, Innovative Advisory Group, manages a number of clients' wealth management needs. When these needs are in the self-directed IRA investment space, we want a company who understand our needs as a firm. We need a designated person or team who understand how we do things to manage our service needs.

For example, if we are working on multiple investments for a specific client, we don't want to speak with a different customer service person each time we call in. It saves us time if we are speaking to a designated person each time who remembers our conversation rather than trying to decipher notes off a computer screen.

This is essential if you are a financial advisor or financial institution, but if you are an individual investor, this should not be important to you at all. Not all companies on our list have a premier service team. If you need a premier service team, look for the companies that have one in place.

The advancement of technology has made it easier to be more efficient with our tasks. Simple things like getting a summary of investments can easily be found on a website rather than calling the company or waiting for a paper statement. However, while these technological advancements make our lives easier, it also makes it easier for criminals to access your information.

You should want a company to prioritize the protection of your private information. You should want this company to have processes and procedures in place to protect your information. They should also have a plan in place in the event that your information is stolen.

Very few people discuss these issues with their self-directed IRA custodian or administrator. I would suggest having a conversation with your custodian to find out how your information is being protected. If they cannot give you a very specific answer, then you might want to consider a different company.

The IRS requires annual valuations for every asset held in a qualified plan (IRA, 401(k), etc). If you have only owned stocks or mutual funds in your IRA or 401(k) before, you might not be familiar with this requirement. Stocks are priced daily, so the requirement is met. However, if you own a horse in your self-directed IRA, then the IRS will want to know the value of the horse at least one time per year.

This is something that most investors are not aware of. You will need to know how your self-directed IRA custodian or administrator handles these annual requirements. Do they contact you to let you know that a valuation is due, or do they expect you to know about it yourself? If they don't contact you, you might forget or miss an important deadline that could put your IRA at risk. It is always better to work with a company that is proactive for ways to make sure you stay compliant with your IRA.

It is likely that you will get the same answer from every company. If a company does not have a positive image, it is unlikely that they will point it out to you, so you will have to do your own research.

There are a few places you can look. You can search the company's website for press releases, the company's regulatory agency, the SEC, the OCC, or state regulator for press releases or other information about any negative infractions or cases that have come up. You can also look at the BBB website, Yelp , and other similar community forums for negative reviews.

You should note that just because the company's name comes up on regulator's website in a negative way, does not mean they are liable or at fault for the issue. Some issues may have the company's name attached to it, only because the assets were held by the custodian with no other involvement by that custodian.

In cases like this, it is common that the company had little or nothing to do with the existing case other than the assets were held there. In other cases where the company has potential liability, it may have more serious implications for the future of that company.

If you read these cases, it will be easy to determine whether the case is pertinent to the company's reputation or if it is just a minor infraction. Many of the larger news stories will have media coverage detailing how the company may or may not have been involved.

In addition to searching the company's reputation, you should also research the the company's principals or owners for their background and any signs of impropriety or fraud.

Fraudulent investments happen. Most of this is due to investors not completing a thorough due diligence process. The SEC, NASAA, RITA, ADISA, and many of these custodians individually warn investors about the potential for fraudulent investments. Despite their warnings, fraudulent investments still occur.

What you need to know is how the company would handle your account or investment if one of these investments happened to you. Do they put the entire burden on you to figure it out? Do they have a procedure in place to keep your IRA compliant? Do they provide you with resources so you can more easily navigate the process of handling a fraudulent investment?

... Or do they leave you stranded to figure it out on your own.

There are limitations as to how much they can help you since many of them cannot provide financial advice. However, there are resources available that they can provide you with. Ask them about the process of how they would handle a potentially fraudulent investment.

Most financial service firms have insurance protecting client accounts. This insurance mostly protects uninvested cash from loss in the event of failure of the firm holding the accounts. It will not protect the investment from a performance-based loss.

Your needs may be similar as if you were using a bank, since most of the custodians are banks. If a bank fails and your cash is FDIC insured, then the FDIC guarantees that you will get your cash back in an amount of up to $250,000. If you hold more than $250,000 in a FDIC insured bank, there is no guarantee that the amount over $250,000 will be returned.

Some financial firms carry additional insurance that covers amounts over $250,000. They can range from $1,000,000 to tens or hundreds of millions in insurance coverage.

If you have cash held in your IRA, then you should ask if the cash is FDIC insured, SPIC insured or another similar type of insurance coverage protecting your uninvested cash from loss. Typically, money market accounts do not qualify for this type of insurance since they are considered investments, not cash.

Having protection on your account is extremely important. This protection should (at minimum) cover the cash you expect to have in your account at any point in time.

Opening a new account might seem to be an important task that needs to be done quickly, but it isn't. If your process is based on such a short timetable that this becomes important, then you might need to reconsider your investment strategy. You should not time your investing strategy to the opening of a new account.

Most of the companies on this list can have an account opened in 24-48 hours. However, this assumes that you as the investor have provided them with all the information they need to open the account.

When you have certain investment strategies that require time-sensitive processing of documents, you want your self-directed IRA custodian or administrator to be very responsive. Most of them claim to have a turnaround time of 24 hours or less. This is what you need as an investor.

If it takes a company any longer than 24 hours, you need to consider whether it makes sense to use them. The company might need more people on their service team, you might have a complex transaction, or the slow turnaround time might be symptomatic of other internal issues that require more effort to research on your part. If there is a consistent issue with turnaround time, it might be better to move on to the next company.

If you do not need a quick turnaround time for your investment strategy, then this will be of secondary importance.

We live in the age of the internet. Every financial services company should provide their clients with online access to their accounts and provide quarterly statements. If the company does not provide these things online, then you should question the value the company puts on the client experience.

You should also ask whether the statements or online access is through the custodian or the administrator? While an administrator might put together a nice statement for you, you should request original statements from the custodian for your accounts. Ideally, you would want direct access to the custodian as it limits the potential for fraudulent activities by an administrator or third party.

Most self-directed IRA custodians and administrators do not provide financial advice. Whether they provide advice or not, they should all disclose this on their website and marketing materials. While most of them do disclose this, frequently investors do not heed this disclaimer. They expect that the custodian or administrator should give them advice and they rely on it as such. I would highly suggest that if you need help with the process of setting up and investing your self-directed IRA into alternative investments, you should consult a licensed professional that specializes in this area.

If you are looking for tax advice, make sure your tax advisor is experienced in this type of investment strategy. Just because you have a tax advisor, doesn't mean he knows about self directed IRAs. Most of the tax advisors have never had experience working with a self directed IRA before. The same holds true for your legal or financial advisor. Many licensed professionals can provide you with advice, but you should try to work with one who has experience with self-directed IRAs. This advice is no different from asking a real estate attorney to give you estate planning advice. You can do it, but finding a specialist might be more prudent.

If you need to find a licensed professional to help you with tax, legal or financial advice pertaining to self-directed IRAs, we have a complete list of professionals that provide legal, tax or financial advice for self-directed IRAs or 401(k)s.

Most of the self-directed IRA custodians and administrators do provide some education to their clients and prospective clients. While this is intended to be for marketing purposes, this education can still be very helpful to an investor who is not aware of how self-directed IRAs work. This should not be a determining factor in your decision, but it is good to know that there are people at the company that can provide you with some general education if you need it.

If you want to learn more about self-directed IRAs or 401(k)s, we have many resources located on our website. We also hold periodic webinars as well, if you are interested in one of those webinars, please sign up for our email list and we will notify you the next time we host one involving self-directed IRAs.

This is one of the harder questions to answer. It is very hard to measure transparency, but we have found a solution for you. To solve this problem, we use the Self Direct Your Retirement Transparency Index to measure each company's level of transparency. We have found this to be a very important metric in our research.

As an investor, you should not expect a company to be 100% transparent. We have heard many different reasons as to why companies don't want to provide information to potential clients. Some of these reasons are valid and some of them are questionable. Either way, our algorithm takes into account many different factors to come up with a number representing how we view the company's transparency with their potential clients.

At the moment, the ratings range from as low as 13% up to the highest rating of 100%. We view any company with a rating above 80% to be an acceptable level of transparency.

Disclosures

Another part of transparency is disclosure. When we created the our list of self-directed IRA custodians and administrators, it took us a long time to determine what type of company each one should be categorized as. Some companies do not clearly state what they do. Are they an administrator? A custodian? A coordinator? A facilitator? Or an investment sponsor? This is actually one of the bigger problems in the self-directed IRA industry. Providing greater transparency with proper disclosures will help investors make better decisions.

Most of the companies on this list do provide disclosures about whether they are a custodian or administrator, but there are also other disclosures to consider.

Does Your Company Provide Financial Advice?

While most companies do state this, many clients mistake their help with advice. It is important the investors understand that self-directed IRA custodians and administrators do not provide financial advice unless it is explicitly stated.

Does your company sell financial products? Is your company affiliated with another company that sells financial products?

This is important because some companies will market that they can help you open a self-directed IRA, but they are really an investment sponsor trying to sell their investments. This is common with real estate.

You should consider keeping a separation between the company providing your custody or administrative services and the company selling you investments. If the relationship is fully disclosed and you understand the relationship, then it might be fine, just make sure you understand the relationship and any bias that may exist due to that relationship.

Make sure everything is disclosed. Legitimate companies will want to provide disclosures for their activities. This is what you should look for in a company, one that is transparent and provides disclosures.

This question will most likely generate the same answer for every company you speak with.

"We are the best of all our peers."

Obviously, they are all promoting themselves as the best solution for your needs. However, you can satisfy your curiosity by asking questions that allude to whether they can provide you with a solid customer experience. Questions such as:

• What is the ratio of clients to customer service representatives?
• How do you handle certain issues such as suspected frauds (as discussed above)?
• How long is your turnaround time for opening an account or processing a transaction?
• What is your average wait (response) time when I call or contact your company?
• Is your company proactive about dealing with certain issues such as valuations (as discussed above)?
• Can I easily access my account information when I need it?

This question of rating the company's customer service is not easy to quantify, there is no one number or rating system that will give you the answer you need. The best thing you can do is ask all the right questions. You should also review forums or websites about self-directed IRAs to hear other people's opinions. They might only be opinions, but if you hear the same criticism from many people, then it might have some merit.

Do your research before you make a decision about what self-directed IRA custodian to use. Spend the time to find the company that is the best fit for your needs. Making a mistake by choosing the wrong one can be a costly and time-consuming endeavor. Put the time in before you make the decision and you will be happy you did.

This task of choosing the best self-directed IRA custodian or administrator is a challenging one, especially for people who are not experienced in using self-directed IRAs.

We have created a course for investors who are looking for a self-directed IRA custodian or administrator to address these common questions. It is called Self Direct Your Retirement. This resource will save your hours, days or weeks of your valuable time trying to figure out all the information you need to make the best decision about your self-directed retirement account. It will provide you with a road map of the ideal process you should follow from start to finish. It will explain self-directed IRA industry terminology in easy to follow language. And it will provide you with an insider's guide to all the information you want on each self-directed IRA custodian and administrator. If you want to learn more about self-directing your retirement, click here to take control of your future.